Oil Price Seen Rising Faster Than Market Shows on Iraq

Iraqi Kurdish forces take position near Taza Khormato as they fight jihadist militants from the Islamic State of Iraq and the Levant (ISIL) positioned five kilometers away in Bashir, 20 kms south of Kirkuk, on June 23, 2014. Photography: Karim Sahib/AFP/Getty Images

June 24 (Bloomberg) -- The worsening conflict in Iraq poses
a bigger risk to long-term oil prices than traders anticipate,
according to banks from Citigroup Inc. and Bank of America Corp.

Brent crude contracts for December 2018 cost $15.26 a
barrel less than August, a spread that’s widened by 9.9 percent
since the end of May. Violence in Iraq is the biggest risk to
new supply this decade from any nation in the Organization of
Petroleum Exporting Countries, the International Energy Agency
said June 13.

While fighters from the Islamic State in Iraq and the
Levant have seized cities north of Baghdad, the majority of oil
assets are in the south and east. Still, having the al-Qaeda
splinter group within miles of the nation’s capital threatens to
derail plans to increase production.

“The market has worked itself into an extraordinary level
of complacency,” Seth Kleinman, European head of energy
research at Citigroup in London, said by phone on June 19. “The
reality is that Iraq matters now and, given what a big component
it is of global production growth, it matters possibly even more
for the future.”

Brent reached a nine-month intraday peak of $115.71 a
barrel on June 19 and settled yesterday at $114.12. December
2018 futures of the grade have advanced 4 percent since ISIL
seized Mosul, settling at $98.86 a barrel. The North Sea grade
is used to price more than half the world’s oil, including
Iraq’s Basrah Light grade.

Shia South

Markets haven’t panicked because Shia-dominated southern
regions remain unaffected and will be fiercely defended against
the ISIL insurgency, Harry Tchilinguirian, BNP Paribas’s head of
commodity markets strategy, said by e-mail on June 20. Southern
Iraq produced more than 85 percent of the country’s 3.1 million
barrels a day of crude in April and shipped all of its 2.5
million barrels of daily exports, Oil Ministry data show.

A long-term deterioration of security because of regular
terrorist attacks could affect international oil companies and
they might scale back operations, Tchilinguirian said.

Exxon Mobil Corp. and BP Plc began removing some employees
from projects in Iraq last week. The IEA cut its forecast for
Iraq’s capacity expansion to 2019 by 470,000 barrels a day in a
report on June 17, citing the insurgency. The country will boost
production by a “conservative” 1.28 million barrels a day to
4.54 million over the period, the IEA estimates.

No Flood

“Foreign upstream investment will be reduced as will the
government’s capacity to progress major infrastructure projects
and resolve bureaucratic issues,” threatening Iraq’s target of
5 million barrels of daily production by 2020, Amrita Sen, chief
oil markets analyst at London-based consultant Energy Aspects
Ltd., said by e-mail yesterday. Brent for delivery at the end of
this decade will probably advance because current price levels
need “a lot of incremental oil supply from Iraq, while all the
current dynamics suggest that the flood may just be a trickle,”
said Sen.

“What’s happening in Iraq is exacerbating the problem” of
prolonged supply disruptions caused by sanctions on Iran,
political feuding in Libya and the civil war in Syria, Francisco
Blanch, head of commodities research at Bank of America in York,
said by phone on June 19. The bank said it expects long-dated
Brent prices to rise.

Critical Source

With Iraqi Kurdish forces moving to secure territory
threatened by the militants, including the northern Kirkuk
oilfield, the current turmoil may yet allow a near-term increase
in the nation’s crude exports, Citigroup and Barclays Plc
predicted.

Production growth from non-OPEC nations such as the U.S.,
which are as important in determining long-term prices as OPEC
supplies, may also mute the market reaction, said
Tchilinguirian.

Still, any persisting danger to such a critical source of
supply growth as Iraq should push long-term prices a few dollars
higher, said Miswin Mahesh, an analyst at Barclays in London.

“The extra production capacity is supposed to come from
Iraq, and you have a big, fluid situation there,” Mahesh said
by phone on June 19. “That does throw the door open for the
value of the back end to be reassessed.”